All Forum Posts by: Bassma Mancilla

Hello @Bassma Mancilla,

Start by determining the amount of renovation you can afford by working backward from the After Repair Value (ARV) to the purchase price.

As an example, I will assume the ARV is $100,000, and you're financing with a 30-year fixed, 25% down investor loan at a 7% interest rate.

Cost Estimates

These are just placeholder numbers used for example purposes. Be sure to replace them with your actual numbers.

• Down payment: $80,000 x 25% = $20,000
• Closing costs (assume 2% of the loan amount): $80,000 x (1-25%) x 2% = $1,200
• Monthly debt service: $400/Mo.
• Monthly property tax (assuming a 1% rate): $80,000 x 1% / 12 = $67/Mo.
• Insurance (Assume $400/Yr): $400 / 12 = $33/Mo.
• Utility cost during renovation: $150/Mo.

Estimate Your Monthly Carrying Cost

• Debt service: $400/Mo.
• Property tax: $67/Mo.
• Insurance: $33/Mo.
• Utilities: $150

The total carrying cost is $650/Mo.

I will assume 2 months to renovate, and 2 months to rent the property, so the total carrying time is 4 months.

What is the maximum renovation cost that these numbers allow?

Maximum Renovation = ARV - Purchase Price - Closing Costs - Carrying Cost x Months Carried

Maximum Renovation = $100,000 - $80,000 - $1,200 - 4 Mo x $650 = $16,200

While the above example is oversimplified, it illustrates how you can estimate the maximum amount you can spend on renovation while staying within the $100,000 after-repair value (ARV). Always include a cost pad to account for any unexpected expenses that may arise during the renovation.

This process can also be used to determine the maximum purchase price you can afford once you know the ARV and the renovation cost to reach the ARV condition. A competent realtor and a trustworthy contractor or handyman are critical.

What to Renovate?

I would renovate items in the following order.

• Health and safety - You must provide your tenants with a safe living environment. Plus, not correcting all health and safety issues are likely to result in injuries and litigation.
• Systems - This includes what is necessary to make the house habitable, such as HVAC, roof, appliances, plumbing, electrical, water damage, etc.
• Market ready - "Market ready condition" refers to changes necessary to attract people who will pay full market rate. This is subjective and you need input from a skilled property manager.
• Enhancements - Enhancements fall into three categories.
  • Required due to market competition. For example, if there are multiple similar properties on the market and they have granite counters in the kitchen, you probably will have to have granite as well.
  • Cost-justifiable enhancements - Changes that justify their cost based on increased rent over a reasonable payback period.
  • Not cost-justifiable enhancements - If an enhancement doesn't pay for itself, it's not worth pursuing, even if it would be nice to have.

Bassma, I hope this helps.

@Bassma Mancilla

thanks for the detailed numbers!  hopefully now folks on the thread will dig in a little bit and provide more specific reactions / guidance.

i have an initial reaction.

i totally understand wanting to "get in" to RE - being on BP makes you want to do that! - but, won't you have >20K (or 30K+ with capex!) just sitting into the property, earning low single digits?  and... at $1100 a month you're probably negative.  some PMs charge a minimum of $125-150 to PM (do you have a PM yet?)  so I'd envision your expenses being about $1100.

thoughts?
  

@Bassma Mancilla Welcome! If you are going the BRRRR method the numbers need to make sense to refinance. Based on the information the repairs will put you over the local comps and a bad refi in my opinion. This property would have to appraise at 160k or around that price to make a BRRRR. Roofs are nothing to mess around with. Heat can wait unless in a very cold climate where temps are below freezing in case an HVAC company cant get there right away. I would look for another deal or put some numbers here so others can help. Dont be discouraged by going out of state. You can get pricing on new roof, hvac and such with a few phone calls and basic info. Maybe mention where this property is located so others can check comps as well. Good luck and keep us posted.

@Bassma Mancilla

are you still within your inspection period and able to negotiate?  or did you accept and lock on a price?

and can you provide ALL THE NUMBERS?  a lot of folks are responding here without necessary details and we're not looking BIG PICTURE.

what's your down payment, PITI, what are the rest of your expenses? what's estimated rent? what is this going to do to your financial picture if you sink 50K cash into it?

if you buy for 80K and put 30K in and comps are 100K... that's not only not a BRRRR, but it's not a good deal. to BRRRR you have to be all in WAY below the comps. make sense?

looking for more info and we can try to help!

 Skip it all together, you make 5 cent from one dollar investment.

In CA/Miami market, you make 2 dollar from 50 cent investment.

 Looks like you're buying a relatively low end property with those numbers. If you are, you are going to likely always have deferred maintenance on the agenda. You'll like have bad tenants, too. Think about if it's worth investing there. If you're just trying to grab $200 in cash flow, tons of way better options.

What I would do ...

Take care of the roof first.

If the HVAC and hot water are still working, bump them down on the priority list.

Address the water intrusion (almost tied with the roof for the #1 position).

Can you still exercise your inspection contingency rights or has that expired?

 Don't rush the process. I am in the same boat as you with trying to acquire a rental. I feel like my inspector is going to make a living off of me alone with how many homes I have been sending him to inspect. This week alone, was 3 properties all 300-350 each. Thats 1k out of my pocket and no return. 1 property he called right after he was done and said its a solid as they get, with only some minor work that is needed. 

Not sure what market you are looking at, definitely do your research before submitting offers. If you are working with a knowledgeable agent, have them walk the property first. If they know what they are doing, they will be able to spot issues right away,

@Bassma Mancilla also talk with the inspector. They will sometimes have an idea of what a repair may cost or even if it’s repairable. Many were or still are licensed GCs.